Business community calls for 500bps rate cut

KARACHI: The business community has called for a substantial reduction in the interest rate by at least 500 basis points, bringing it down from the current 19.5 per cent to 14.5 per cent in the upcoming monetary policy statement.

This request comes as inflation continues to decline, reaching 9.6 per cent in August. Moody’s recently upgraded Pakistan’s local and foreign currency issuer and senior unsecured debt ratings to Caa2 from Caa3.

With inflation dropping to 9.6 per cent, the lowest level in three years, there is strong justification for reducing the policy rate. This decline follows a peak of 38 per cent in May 2023, indicating that inflationary pressures have eased considerably. The last instance of single-digit inflation was recorded in October 2021 at 9.2 per cent, when the policy rate was 7.25 per cent. Business community leaders argue that a significant reduction in the policy rate is urgently needed to stimulate industrial and economic activities.

Chairman of the Businessmen Group (BMG) Zubair Motiwala said that large-scale manufacturing growth for FY24 was a marginal 0.9 per cent, reflecting the negative impact of prolonged high policy rates. He asserted that lowering the policy rate would provide much-needed relief to the manufacturing sector and stimulate economic growth.

“The private sector’s share of total credit has sharply declined from 29.7 per cent in July 2019 to 19.8 per cent in July 2024. Reducing the policy rate could encourage borrowing and investment in the private sector, boosting economic activity,” he said.

Motiwala also highlighted that Pakistan’s real interest rate (ie, the policy rate minus inflation) currently stands at 9.9 per cent, significantly higher compared to neighbouring countries such as India, China and Bangladesh, where real interest rates are 3.0 per cent, 2.9 per cent, and -3.2 per cent, respectively. “In this scenario, a reduction in the policy rate would certainly enhance Pakistan’s regional competitiveness,” he added.

He pointed out that a 1.0 per cent reduction in the policy rate could save approximately Rs467 billion in debt servicing costs, offering substantial fiscal relief and reducing the financial burden on the government.

President of the Karachi Chamber of Commerce & Industry (KCCI) Iftikhar Ahmed Sheikh observed that the significant decline in global commodity prices, including a 23.1 percent reduction in wheat prices, coupled with improved domestic agricultural output, has eased inflationary pressures.

He noted that the sharp increase in the policy rate from 7.0 per cent in August 2021 to 22 per cent by May 2023 did not effectively control inflation, suggesting that alternative monetary tools should be considered. Sheikh believes that a reduction in the policy rate could help stimulate economic growth. “The government’s share of total credit has risen to 79.3 per cent as of July 2024, crowding out the private sector. A reduction in the policy rate could help rebalance credit distribution toward the private sector,” he added.

Given these factors, both Zubair Motiwala and Iftikhar Sheikh hope that the State Bank of Pakistan (SBP) will implement a substantial reduction of at least 500 basis points in its next monetary policy statement. Such a move would be widely welcomed by the business community, as it would provide much-needed relief to businesses struggling with the excessively high cost of doing business.